It has been a busy week for the world oil markets, with crude (read Brent) rallying to five-month highs, a relatively swift recovery of three-quarters of the Texas refining capacity that was shuttered by Hurricane Harvey, and Venezuela thumbing its nose at US sanctions by asking its oil trading partners to switch from the greenback to the euro or other currencies. It was also a week of digesting three major monthly reports on the state of the markets, from the IEA, OPEC, and the EIA. The first two shifted to a more bullish stance on global oil consumption growth this year, while the third revised down its estimates! The decline in OPEC’s August production over July grabbed headlines, and much was made of the group’s marginally improved compliance rates, but these detract from the main story, which is that Libya and Nigeria together continue to cancel out more than half the reductions being made by their peers. OPEC is still not looking for a solution to this problem, sanguine in its outlook that it is doing enough to rebalance the markets. Is it?
Brent trekked up to a five-month high this week, and its futures curve remains firmly in backwardation. We have identified a bunch of reasons behind the strength in the North Sea benchmark, but a rebalancing market is not one of them.
Is Russia trimming crude output under the OPEC/non-OPEC supply cut agreement of last December or is it pumping even more this year? According to OPEC’s latest monthly report, Russian production in the first half of this year dwarfed the level achieved last November, which itself was a post-Soviet high. Why is OPEC not calling out Moscow on this one?
There were two diametrically opposite views this week on the prospects of global oil demand growth from leading agencies. The International Energy Agency and OPEC both raised their forecasts for annual growth in oil use in 2017 compared with their August reports, but the US Energy Information Administration revised down its estimates for the same. We would caution against extrapolating a robust summer demand season in the OECD to the rest of the year.
The OPEC/non-OPEC Ministerial Monitoring Committee due to meet on September 22 is expected to discuss the Saudi proposal of monitoring crude exports instead of simply relying on production figures. Even if the meeting doesn’t actually result in a new strategy to measure compliance — a likely outcome, given the complexities involved — it would at least serve to put the errant producers on notice.
Venezuela stopped accepting and making US dollar payments this week in favour of euros for its crude exports and refined product imports. Its considerable oil trade with the US will still be denominated in the dollar, we presume, but the move could lend support to other efforts and voices over the years, prominently from China, Russia and Iran, to move away from the greenback for pricing oil.
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Headline crude prices for the week beginning 11 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
The year’s final upstream auctions were touted as a potential bonanza for Brazil, with pre-auction estimates suggesting that up to US$50 billion could be raised for some deliciously-promising blocks. The Financial Times expected it to be the ‘largest oil bidding round in history’. The previous auction – held in October – was a success, attracting attention from supermajors and new entrants, including Malaysia’s Petronas. Instead, the final two auctions in November were a complete flop, with only three of the nine major blocks awarded.
What happened? What happened to the appetite displayed by international players such as ExxonMobil, Shell, Chevron, Total and BP in October? The fields on offer are certainly tempting, located in the prolific pre-salt basin and including prized assets such as the Buzios, Itapu, Sepia and Atapu fields. Collectively, the fields could contain as much as 15 billion barrels of crude oil. Time-to-market is also shorter; much of the heavy work has already been done by Petrobras during the period where it was the only firm allowed to develop Brazil’s domestic pre-salt fields. But a series of corruption scandals and a new government has necessitated a widening of that ambition, by bringing in foreign expertise and, more crucially, foreign money. But the fields won’t come cheap. In addition to signing bonuses to be paid to the Brazilian state ranging from US$331 million to US$17 billion by field, compensation will need to be paid to Petrobras. The auction isn’t a traditional one, but a Transfer of Rights sale covering existing in-development and producing fields.
And therein lies the problem. The massive upfront cost of entry comes at a time when crude oil prices are moderating and the future outlook of the market is uncertain, with risks of trade wars, economic downturns and a move towards clean energy. The fact that the compensation to be paid to Petrobras would be negotiated post-auction was another blow, as was the fact that the auction revolved around competing on the level of profit oil offered to the Brazilian government. Prior to the auction itself, this arrangement was criticised as overtly complicated and ‘awful’, with Petrobras still retaining the right of first refusal to operate any pre-salt fields A simple concession model was suggested as a better alternative, and the stunning rebuke by international oil firms at the auction is testament to that. The message is clear. If Brazil wants to open up for business, it needs to leave behind its legacy of nationalisation and protectionism centring around Petrobras. In an ironic twist, the only fields that were awarded went to Petrobras-led consortiums – essentially keeping it in the family.
There were signs that it was going to end up this way. ExxonMobil – so enthusiastic in the October auction – pulled out of partnering with Petrobras for Buzios, balking at the high price tag despite the field currently producing at 400,000 b/d. But the full-scale of the reticence revealed flaws in Brazil’s plans, with state officials admitting to being ‘stunned’ by the lack of participation. Comments seem to suggest that Brazil will now re-assess how it will offer the fields when they go up for sale again next year, promising to take into account the reasons that scared international majors off in the first place. Some US$17 billion was raised through the two days of auction – not an insignificant amount but a far cry from the US$50 billion expected. The oil is there. Enough oil to vault Brazil’s production from 3 mmb/d to 7 mmb/d by 2030. All Brazil needs to do now is create a better offer to tempt the interested parties.
Results of Brazil’s November upstream auctions:
Global liquid fuels
Electricity, coal, renewables, and emissions